Thursday, January 29, 2009

What is the best stimulus plan to get the economy going again? The answer to this may depend on what country you come from. Your government is likely picking the biggest focus of its stimulus package based on how it understands how your local economy works. Here are my views, based on my largely unscientific and purely anecdotal observations:

Large spending on public infrastructure. You have largely untapped local resources. You have relatively minuscule business activity because your physical infrastructure, such as roads, bridges, and airports are largely non-existent or unreliable. You are likely one of the emerging markets.

Large spending on alternative infrastructure. You are confident that your local entrepreneurs are quick at capitalizing new capacities in largely-expensive but promising new technologies, such as solar and wind power, nuclear fuel, and the like. They are good at innovating new business models based on new technology. Your local population likely has a high social conscience and are willing to spend more to help conserve the environment. You probably have enough international clout, such that you can make this infrastructure the new default standard for other countries to follow, once you have made the initial roadmap. Precisely, your local companies probably expect to make a killing later on selling their technology to foreigners. You are likely the US, Japan, or Germany.

Increase in social safety nets. You are likely a largely consumer-driven economy, and your local consumers are currently very vulnerable. It may be because much of them are from the ageing demographic, or largely derive their livelihoods from salaried employment. Whatever local businesses you have follow existing technologies from abroad, or perhaps, are largely foreign branches of companies from more entrepreneurial countries. Your existing public infrastructure is probably already of highest-class. A very large spending program on alternative infrastructure will probably not be able to recoup its cost because your local population growth is stagnant, such that the increased spending will only result in increased inflation rather than increased business activity. You are likely much of Western Europe, Canada, or New Zealand.

Increase in social services spending. You probably have a population that can be better-served by better educational facilities, better social services, better healthcare, better law enforcement agencies, etc. You believe that an improvement in these public services will cause people to pay less for these out of pocket (if they otherwise get them from private sector providers), thereby inducing them to allocate more expenditures to a broader segment of the economy. You are probably right. And you are probably any country in the world.

Business income tax rate cut. You probably have very high business taxes, and your high taxes are probably being passed on as higher prices of goods and services. Lowering tax rate would likely induce local business to lower their prices, and you likely believe that local consumers will start buying once they do. Perhaps local consumers are still largely employed, and are only waiting it out for lower prices. I don’t know what country you are.

Additional business tax credits. Ditto for additional business tax credit measures. In addition to lowering the prices of goods, tax credit that is meant to induce more hiring will likely result in more hiring by businesses willing to bet that increased hiring will result in a more vibrant consumer economy. You think everyone will end up benefiting, so everyone will do his share. Your local population is probably reeling from recent job losses, but will likely spend again once they know they will have a livelihood to support themselves with. You are likely much of Western Europe, Canada, Australia, or New Zealand.

No major fiscal move, keeping the government off the market. This is probably best if your economy is very heterogeneous, made up numerous small-scale businesses, perfect competition exists, and no one firm is too big to fail. You are probably heartland USA, heartland any country.

Of course, I am generally generalizing. But each plan is best in certain circumstances.

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"Conventional approaches, unconventional conclusions" on the global finance and economic issues of the day. Rogue Econ has been a banker and financial consultant in several countries. Welcome to my blog.